Too frail to fail: a look at seniors' residence failures

Par Robert Frank
le 18 mai 2012

Businesses fail all the time. It’s called creative destruction, and it’s one of the things that North America responds to exceedingly well. That makes our economy more dynamic than Europe, where bankruptcy is still thought of as a moral failure, the way that adultery is thought of here.

In contrast, North American insolvency is usually a stigma-free way to liberate capital. It lets those who have gone bankrupt quickly pick up the pieces and move on.

It’s a straightforward process usually left to commerce and the courts. So it’s rare to see government get involved, as it did four years ago when the world’s financial system teetered on the brink of the abyss. “Too big to fail” became the watchword for state intervention unprecedented in the history of the planet.

The justification, of course, was that it would have cost far more not to intervene. It’s too soon to judge whether that was brilliant, though, or simply apocalypse later, since the financial aftershocks reverberate to this day.

So it’s worth taking a look, closer to home, at what might be the tip of another big iceberg, meandering its way toward the good ship SS Old Age.

The failures of two suburban Montreal seniors residences at first seemed just a local story, as unpaid bills mounted, bailiffs showed up and owners petitioned for the protection of the courts.

Scratch the surface, though, and you find a string of similar reports elsewhere in Canada: Troubled seniors residences that seem only of local concern—that is, until you discover that many they share the same cast of owners and operators.

From there, it’s easy to discover that the ownership web of many seniors residences is, in turn, securitized by large investment firms in Toronto and elsewhere. Collectively, they are worth hundreds of millions of dollars. Investors buy thousand-dollar shares in real estate funds, hoping to achieve a much higher return than what they can earn on today’s pathetic interest rates on bonds.

So far, so good. Private investment makes capital available to build the seniors residences that today’s baby boomers will soon need—and it allocates resources more efficiently than any government could.

The risk is capitalism’s natural cycle of boom and bust. Dollard des Ormeaux mayor Ed Janiszewski astutely attributed the seniors residence failures in his town to excessively exuberant investors who, several years ago, built more facilities than are currently needed, leading to a vacancy rate that is commercially unsustainable.

Meanwhile, the financial firms that securitize investments in what they term “assisted living facilities” market them as “residential investments”.

Not so fast. As Liberty Assisted Living’s string of insolvencies has illustrated, eldercare facilities are much more that a roof over seniors’ heads. When our apartment building owner goes bankrupt, most of us can still buy groceries and feed, clean and dress ourselves, as well as see to our own medical needs. The same can’t be said of seniors who depend—sometimes 24-hours-a-day—on the care of others.

Château Dollard and Château Royal are the proverbial canaries in the coal mine. To be sure, court appointed receivers Éric St. Amour and Benoît Clouâtre have, commendably, spared no effort to ensure that the needs of vulnerable residents are seen to.

However, a series of massive failures of securitized seniors residences, along the lines of the 2008 mortgage-backed securities crisis, would instantly outstrip private industry’s ability to cope. Too frail to fail, seniors’ needs would suddenly be thrust onto the state.

Government policymakers ought therefore to cast a wary eye on the increasing securitization of old age facilities. They need to carefully assess the possible unplanned liability that taxpayers could face from a large-scale set of failures and encourage the investment community to make provisions to cushion such a collapse. The potential human cost to a rapidly growing proportion of the voting population would otherwise be too great a risk to bear.